# Variable Overhead Cost Variance

# Illustration - Problem

The factory worked for 26 days putting in 860 hours work every day and achieved an output of 2,050 units. The expenditure incurred as overheads was 49,200 towards variable overheads and 86,100 towards fixed overheads.

Calculate overhead variances

Standard | Actual | Absorbed | ||||
---|---|---|---|---|---|---|

Budgeted | for AO | for AI | for AP | |||

A | B | C | ||||

a) Output (units) b) Days c) Time (hrs) d) Overhead Cost 1) Variable 2) Fixed 3) Total | 2,000 25 40,000 80,000 1,20,000 | 2,050 26 49,200 86,100 1,35,300 |

The working table is populated with the information that can be obtained as it is from the problem data. The rest of the information that is present in a full fledged working table that we make use of in problem solving is filled below.

# Formulae - Variable Overhead Cost Variance ~ VOHCV

The Variable Overhead Cost Variance is the difference between the variable overhead absorbed and the actual variable overhead incurred. It represents the Under/Over Absorbed Variable Overhead.

⇒ Variable Overhead Cost Variance (**VOHCV**)

= | AbC − ACAbsorbed Cost − Actual Cost |

## Actual Cost (Variable Overhead)

Actual cost incurred is ascertained from the financial information.Where the actual variable overhead cost incurred is not known, it can be calculated based on actual measure of the factor used for absorbing overheads like output, time worked etc. provided the related actual rate of overhead incurred is also known.

Actual Cost ~ **AC**

= | AO × AR/UO | |

Or | = | AT × AR/UT |

Or | = | AD × AR/D |

We restrict our discussion to the most common measures of activity, units of output, time worked for inputs and days for periods.

## Absorbed Cost (Variable Overhead)

In problem solving absorbed cost may be provided as a calculated figure. In such a case we do not get concerned about the rate of absorption unless specifically needed in some calculation.Where the absorbed cost is not known we may have to calculate the cost. This calculation is based on the rate of absorption that has been used in the context to absorb total overheads.

### Absorption based on output (units)

Absorbed Cost ~

**AbC**= AO × AbR/UO Or = ST(AO) × AbR/UT Or = SD(AO) × AbR/D ### Absorption based on inputs (time)

Absorbed Cost ~

**AbC**= AT × AbR/UT Or = SO(AT) × AbR/UO Or = SD(AT) × AbR/D ### Absorption based on periods (days)

Absorbed Cost ~

**AbC**= AD × AbR/D Or = SO(AD) × AbR/UO Or = ST(AD) × AbR/UT

## Formula in useful forms

VOHCV | = | AbC − AC |

## Absorption based on output units | ||

Or | = | AO × (AbR/UO − AR/UO) Actual Output × Difference between absorbed and actual Rates per unit output. |

## Absorption based on input (time) | ||

= | AT × (AbR/UT − AR/UT) Actual Time × Difference between budgeted and actual Rates per unit time | |

## Absorption based on periods (days) | ||

= | AD × (AbR/D − AR/D) Actual Days × Difference between budgeted and actual Rates per day |

## Note

- AbR/UO, AbR/UT, AbR/D in the above calculations pertains to variable overheads.
- Theoretically there are many possibilities. Only those that provide peculiar routes to solve problems are given as an academic exercise.
- Finding the costs by building up the working table and using the formula involving costs is the simplest way to find the VOHCV.

# Solution - (Assuming absorption is based on Output)

Standard | Actual | Absorbed | ||||
---|---|---|---|---|---|---|

Budgeted | for AO | for AI | for AP | |||

A | B | C | ||||

I) Factor | 1.025 | |||||

a) Output (units) b) Periods (Days) c) Time (hrs) d) Overhead Cost 1) Variable e) Overhead Rate (/Unit) 2) Fixed 3) Total 1) Variable 2) Fixed 3) Total (d1) ÷ (a) (d2) ÷ (a) (d3) ÷ (a) 1) Variable 2) Fixed 3) Total (d1) ÷ (c) (d2) ÷ (c) (d3) ÷ (c) 1) Variable 2) Fixed 3) Total (d1) ÷ (b) (d2) ÷ (b) (d3) ÷ (b) | 2,000 25 20,000 40,000 80,000 1,20,000 20 2 1,600 | 25.625 20,500 | 2,050 26 22,360 49,200 86,100 1,35,300 24 | 41,000 =BR =BR =BR |

In the absence of information to the contrary we assume

AbR/UO(V) | = | BR/UO(V) |

= | 20 |

Absorbed Variable Overhead Cost ~ AbC(V)

= | AO × AbR/UO(V) |

= | 2,050 units × 20/unit |

= | 41,000 |

Variable Overhead Cost Variance

VOHCV | = | AbC − AC |

= | 41,000 − 49,200 | |

= | − 8,200 [Adv] |

## Alternatives

Variable Overhead Cost Variance

**VOHCV**= **AO × (AbR/UO − AR/UO)**= 2,050 units × (20/unit − 24/unit) = 2,050 units × (− 4/unit) = − 8,200 [Adv]

(AO) | = |
| ||

= |
| |||

= | 1.025 |

## Calculations based on input (time)

The absorbed overhead may be ascertained using the data relating to input.Standard input (time) for actual output and the overhead absorption rate per unit input are required for such a calculation.

One unit per 10 hours productive time

⇒ Budgeted Time per unit = 10 hours

Total Budgeted Time

= Budgeted Output × Budgeted Time/unit = 2,000 units × 10 hrs/unit = 20,000 hrs Total Actual Time

= Number of Days × Actual Time/day = 26 days × 860 hrs/day = 22,360 labor/labour hrs ST(AO) = BT × AO BO = 20,000 hrs × 1.025 = 20,500 hrs In the absence of information to the contrary we assume

AbR/UT(V) = BR/UT(V) = 2 Absorbed Variable Overhead Cost ~ AbC(V)

= ST(AO) × AbR/UT(V) = 20,500 hrs × 2/hr = 41,000 ## Calculations based on periods (days)

The absorbed overhead may be ascertained using the data relating to periods, days in this case.Standard periods (days) for actual output and the overhead absorption rate per unit period (day) are required for such a calculation.

SD(AO) = BD × AO BO = 25 days × 1.025 = 25.625 days In the absence of information to the contrary we assume

AbR/D(V) = BR/D(V) = 1,600 Absorbed Variable Overhead Cost ~ AbC(V)

= SD(AO) × AbR/D(V) = 25.625 days × 1,600/day = 41,000

Building the working table with all the values needed and then using the formula based on values would be the simplest method to arrive at the value of the variance.

The method of absorption adopted and the method of calculation adopted would influence the calculation of the overhead absorbed only.

# Solution - (Assuming absorption is based on Input [time])

Standard | Actual | Absorbed | ||||
---|---|---|---|---|---|---|

Budgeted | for AO | for AI | for AP | |||

A | B | C | ||||

I) Factor | 1.118 | |||||

a) Output (units) b) Periods (Days) c) Time (hrs) d) Overhead Cost 1) Variable e) Overhead Rate (/Unit) 2) Fixed 3) Total 1) Variable 2) Fixed 3) Total (d1) ÷ (a) (d2) ÷ (a) (d3) ÷ (a) 1) Variable 2) Fixed 3) Total (d1) ÷ (c) (d2) ÷ (c) (d3) ÷ (c) 1) Variable 2) Fixed 3) Total (d1) ÷ (b) (d2) ÷ (b) (d3) ÷ (b) | 2,000 25 20,000 40,000 80,000 1,20,000 20 2 1,600 | 2,236 27.95 | 2,050 26 22,360 49,200 86,100 1,35,300 2.20 | 44,720 =BR =BR =BR |

1,230 |

559 |

One unit per 10 hours productive time

⇒ Budgeted Time per unit = 10 hours

Total Budgeted Time

= | Budgeted Output × Budgeted Time/unit |

= | 2,000 units × 10 hrs/unit |

= | 20,000 hrs |

Total Actual Time

= | Number of Days × Actual Time/day |

= | 26 days × 860 hrs/day |

= | 22,360 labor/labour hrs |

In the absence of information to the contrary we assume

AbR/UT(T) | = | BR/UT(T) |

= | 2/hr |

Absorbed Variable Overhead Cost ~ AC(T)

= | AO × AbR/UT(T) |

= | 22,360 hrs × 2/hr |

= | 44,720 |

Variable Overhead Cost Variance

VOHCV | = | AbC − AC |

= | 44,720 − 49,200 | |

= | − 4,480 [Adv] |

## Alternatives

Variable Overhead Cost Variance

**VOHCV**= **AT × (AbR/UT − AR/UT)**= 22,360 hrs × (2/hr −

/hr)1,230 559 = 22,360 hrs × (

/hr)1,118 − 1,230 559 = 40 × (− 112) = − 4,480 [Adv]

(AT) | = |
| ||

= |
| |||

= | 1.118 |

## Calculations based on output

The absorbed overhead may be ascertained using the data relating to output.Standard output for actual input (time) and the overhead absorption rate per unit output are required for such a calculation.

SO(AT) = BO × AT BT = 2,000 units × 1.118 = 2,236 units In the absence of information to the contrary we assume

AbR/UO(T) = BR/UO(T) = 20 Absorbed Variable Overhead Cost ~ AbC(T)

= SO(AT) × AbR/UO(T) = 2,236 units × 20/unit = 44,720 ## Calculations based on periods (days)

The absorbed overhead may be ascertained using the data relating to periods, days in this case.Standard periods (days) for actual output and the overhead absorption rate per unit period (day) are required for such a calculation.

SD(AT) = BD × AT BT = 25 days × 1.118 = 27.95 days In the absence of information to the contrary we assume

AbR/D(T) = BR/D(T) = 1,600 Absorbed Variable Overhead Cost ~ AbC(T)

= SD(AO) × AbR/D(T) = 27.95 days × 1,600/day = 44,720

Building the working table with all the values needed and then using the formula based on values would be the simplest method to arrive at the value of the variance.

The method of absorption adopted and the method of calculation adopted would influence the calculation of the overhead absorbed only.

# Solution - (Assuming absorption is based on Periods [days])

Standard | Actual | Absorbed | ||||
---|---|---|---|---|---|---|

Budgeted | for AO | for AI | for AP | |||

A | B | C | ||||

I) Factor | 1.04 | |||||

a) Output (units) b) Periods (Days) c) Time (hrs) d) Overhead Cost 1) Variable e) Overhead Rate (/Unit) 2) Fixed 3) Total 1) Variable 2) Fixed 3) Total (d1) ÷ (a) (d2) ÷ (a) (d3) ÷ (a) 1) Variable 2) Fixed 3) Total (d1) ÷ (c) (d2) ÷ (c) (d3) ÷ (c) 1) Variable 2) Fixed 3) Total (d1) ÷ (b) (d2) ÷ (b) (d3) ÷ (b) | 2,000 25 20,000 40,000 80,000 1,20,000 20 2 1,600 | 2,080 20,800 | 2,050 26 49,200 86,100 1,35,300 1,892.31 | 41,600 =BR =BR =BR |

24,600 |

13 |

In the absence of information to the contrary we assume

AbR/UT(T) | = | BR/UT(T) |

= | 1,600/day |

Absorbed Variable Overhead Cost ~ AC(T)

= | AD × AbR/D(T) |

= | 26 days × 1,600/day |

= | 41,600 |

Variable Overhead Cost Variance

VOHCV | = | AbC − AC |

= | 41,600 − 49,200 | |

= | − 7,600 [Adv] |

## Alternatives

Variable Overhead Cost Variance

**VOHCV**= **AD × (AbR/D − AR/D)**= 26 days × (1,600/day −

/hr)24,600 13 = 26 days × (

/hr)20,800 − 24,600 13 = 2 × (− 3,800) = − 7,600 [Adv]

(AD) | = |
| ||

= |
| |||

= | 1.04 |

## Calculations based on inputs (time)

The absorbed overhead may be ascertained using the data relating to input (time).Standard input (time) for actual periods (days) and the overhead absorption rate per unit input are required for such a calculation.

One unit per 10 hours productive time

⇒ Budgeted Time per unit = 10 hours

Total Budgeted Time

= Budgeted Output × Budgeted Time/unit = 2,000 units × 10 hrs/unit = 20,000 hrs Total Actual Time

= Number of Days × Actual Time/day = 26 days × 860 hrs/day = 22,360 labor/labour hrs ST(AD) = BT × AD BD = 20,000 hrs × 1.04 = 20,800 hrs In the absence of information to the contrary we assume

AbR/UT(T) = BR/UT(T) = 2 Absorbed Variable Overhead Cost ~ AbC(T)

= ST(AD) × AbR/UT(T) = 20,800 hrs × 2/hr = 41,600 ## Calculations based on output

The absorbed overhead may be ascertained using the data relating to output.Standard output for actual periods (days) and the overhead absorption rate per unit output are required for such a calculation.

SO(AD) = BO × AD BD = 2,000 units × 1.04 = 2,080 units In the absence of information to the contrary we assume

AbR/UO(T) = BR/UO(T) = 20 Absorbed Variable Overhead Cost ~ AbC(T)

= SO(AD) × AbR/UO(T) = 2,080 units × 20/unit = 41,600

Building the working table with all the values needed and then using the formula based on values would be the simplest method to arrive at the value of the variance.

The method of absorption adopted and the method of calculation adopted would influence the calculation of the overhead absorbed only.

# Variable Overhead Cost Variance - Miscellaneous Aspects

## Nature of Variance

Based on the relations derived from the formulae for calculating VOHCV, we can identify the nature of Variance

- AbC ___ AC
One that is relevant from these depending on the basis for absorption used

- AbR/UO ___ AR/UO
- AbR/UI ___ AR/UI
- AbR/UP ___ AR/UP

The variance would be

- zero when =
- Positive when >
- Negative when <

## Interpretation of the Variance

The following interpretations may be made

### No Variance

The incurred variable overhead is the same as the absorbed variable overhead### Favourable/Favorable

The incurred variable overhead is lesser than the absorbed variable overhead### Adverse

The incurred variable overhead is greater than the absorbed variable overhead## Who is answerable for the Variance?

Since the Variable Overhead Cost Variance represents the total difference on account of a number of factors it would not be possible to make someone or some department answerable for the variance.This explains the reason for analysing the variance and segregating it into its constituent parts.

## Reasons for variance not specific

The variable overhead cost variance would only let us know that the actual variable overhead cost is greater or lesser compared to the absorbed cost. It does not help us answer specific questions relating to the variance like, is it on account of the variation in the expenses incurred or the time taken for unit output etc.Taking the data from the above illustration, we can notice that variance in variable overhead cost may be on account of

- The actual overhead incurrence rate per unit time/output being different from the budgeted rate.
Overhead Rate per unit - Actual 22 to 20 budgeted.

Overhead Rate per unit time - Actual 2.02 to 2 budgeted.

- The rate at which the output has been achieved is different from the budgeted rate.
Time per unit output - 10.91 actual to 10 budgeted.

Standard Actual Absorbed Budgeted for AO for AI for AP A B C a) Output (units)

b) Periods (Days)

c) Time (hrs)

d) Overhead Cost

...

g) Time/unit(hrs) (c) ÷ (a)2,000

25

20,000

102,050

26

22,360

10.91The actual time per unit shown as 10.91 is an approximation of2,236 205

- The actual overhead incurrence rate per unit time/output being different from the budgeted rate.

# Constituents of Variable Overhead Cost Variance

VOHCV | = | AbC − AC |

Adding and deducting SC(AO) and SC(AT) on the RHS | ||

= | AbC − AC + SC(AO) − SC(AO) + SC(AT) − SC(AT) | |

= | AbC − SC(AO) + SC(AT) − SC(AO) + SC(AT) − AC | |

= | [AbC − SC(AO)] + [SC(AO) − SC(AT)] + [SC(AT) − AC] | |

= | Absorption Variance + Efficiency Variance + Expenditure Variance | |

= | VOHABSV + VOHEFFV + VOHEXPV |

## Alternative

Where the overheads are being absorbed based on output and the budgeted rate is the absorption rate, then AbC = SC(AO).In such a case the Absorption Variance does not exist and the Variable Overhead Cost Variance may be divided into only two component parts, the efficiency and expenditure variances.

VOHCV | = | AbC − AC |

Adding and deducting SC(AT) on the RHS | ||

= | AbC − AC + SC(AT) − SC(AT) | |

= | AbC − SC(AT) + SC(AT) − AC | |

= | [AbC − SC(AT)] + [SC(AT) − AC] | |

= | Efficiency Variance + Expenditure Variance | |

= | VOHEFFV + VOHEXPV |

The only difference is in the terms that appear in the formula for efficiency variance and the absence of absorption variance. Absorbed cost (AbC) replaces standard cost of actual output [SC(AO)] in the formula for efficiency variance.

# Formulae using Inter-relationships among Variances

- VOHCV = TOHCV − FOHCV
- VOHCV = VOHEFFV + VOHEXPV
- VOHCV = TOHCV − FOHVOLV − FOHEXPV
- VOHCV = TOHCV − FOHCALV − FOHCAPV − FOHEFFV − FOHEXPV

## Verification

The interrelationships between variances would also be useful in verifying whether our calculations are correct or not.Basis of Absorption | |||
---|---|---|---|

Output | Input (Time) | Periods (Days) | |

VOHABSV + VOHEFFV + VOHEXPV | — — — | — — — | — — — |

a) VOHCV | − 8,200 | − 4,480 | − 7,600 |

FOHCALV + FOHCAPV + FOHEFV | — — — | — — — | — — — |

FOHVOLV FOHEXPV | — — | — — | — — |

b) FOHCV | — | — | — |

TOHCV (a) + (b) | − 12,300 | − 1,140 | − 10,500 |

To enable understanding we have worked out the illustration under the three possible scenarios of overhead being absorbed on output, input and period basis.

Please be aware that only one of these methods would be in use.